NICOLAS SARKOZY, France's president, rushed back from his holiday on August 10th to defend the country from financial attack. In a day of rumour, panic and denials, shares in Société Générale, the country's third-biggest bank, fell by almost a fifth before recovering some ground and closing down 15%.
The immediate cause for worry was a question-mark over whether France will keep its triple-A rating after Standard & Poor's cut America's on August 5th. France's debt stood at 82% of GDP last year, from 64% in 2007. This is one of the highest of any AAA-rated country. That, investors fear, means it could be the next target for a downgrade, especially if already anaemic economic growth falters further. The extra yield required by investors to hold French debt instead of German Bunds jumped to almost triple the average level of 2010 while the cost of insuring against a default by France reached new highs during the week.
After an emergency meeting of ministers, Mr Sarkozy pledged to fulfil recent promises on debt reduction, regardless of whether economic growth slows. More reassuringly, Moody's, S&P and Fitch, the three major credit-rating agencies, all said France's rating was stable.
As Société Générale's shares tumbled, the cost of insuring its debt against default soared by 55 basis points, suggesting it will face a significant increase in borrowing costs. Shares of other French banks were also hit. Those in BNP Paribas, the euro zone's biggest bank, fell by 9.5%; Crédit Agricole's fell by 12%.
"French banks have a bit of everything—exposure to Greece and to Italy—and investors are extremely worried about their funding costs," says one analyst. Some investors feared that Mr Sarkozy's meeting was held to address a sudden crisis at Société Générale. The Elysée palace denied that any bank had been present at the meeting and Société Générale denied "all market rumours".
The ultimate fear is that if France's rating was cut then the European Financial St
Financial Turmoil Evokes Comparison to 2008 Crisis By NELSON D. SCHWARTZ It feels eerily familiar: Stocks are plummeting. The economy is slowing. Politicians are scrambling to find solutions but are mired in disagreement.
Many Americans are wondering whether they are in for a repeat of the financial crisis of 2008.
The answer is a matter of fierce debate among economists and market experts. Many say the risks are lower today — at least in terms of an immediate crisis — because the financial system over all is healthier and there are fewer hidden problems. But the experts add that there are reasons to worry, and they do not rule out a quick downward spiral if politicians in the United States and in Europe cannot calm investors by addressing fundamental financial threats.
The core problem, as it was three years ago, is too much debt that borrowers are having a hard time repaying — but this time it is government debt rather than consumer debt.
"So far it's not as bad as 2008, but it could get much worse because the sovereign debt concerns are much more global than the subprime mortgage risk of 2008," said Darrell Duffie, a professor of finance at Stanford and an expert on the banking system.
A growing lack of confidence is perhaps the most troubling similarity to 2008 and the biggest worry. "There's a level of fear out there that is a little similar," said Michael Hanson, a senior economist with Bank of America Merrill Lynch. "It's not just the fundamentals. It's the fear of the unknown."
Most of the attention so far has been focused on volatility in stocks, with investors spooked by three heart-stopping declines in the last five trading days — including Wednesday's 4.6 percent drop in the Dow Jones industrial average.
But the bigger concern of many financiers and government officials was signs of stress on Wednesday in European credit markets, which are essential to financing the day-to-day operations of banks and companies there.
Unitech-Real Estate Titanic
A closer look at Unitech's FY11 Annual Report under-scores the depths which this once Real Estate darling is now plumbing.
-Debtor situation deterioration is a concern with debtors rising 69 per cent yoy to Rs 21.5 bn. Pile-up has happened in Greater Noida properties and certian Commercial projects sold before FY09.
-Unitech's non property revenues declined 22 per cent yoy in FY11 to Rs 2.3 bn, as construction business declined. Key disappointment was a slow 12 per cent yoy rise in Realty Revenues to Rs 29.5 bn.
-Unitech's execution ramp-up was slower than expected here. Deliveries declined 38 per cent yoy to 4.3 mn sq feet.
-Unitech resorted to exotic accounting to show a lower working capital by reclassifying FY10's cash balance as an investment and writing off half of that during FY11.
-The cash balances of Rs 2.3 bn were shown as yield enhancement certificates and Rs 1.14 bn has been written off in FY11 which equals 14 per cent of PBT. Possibility of another Rs 1.16 bn to be written off in FY12 exists.
-Surprise surprise, the Bank Term loans have been replaced by Public Deposits which rose 4X FY10 numbers, worse the deposits carry the same coupon of 14 per cent just as bank loans did.
-So what was the Rs 6.8 bn raised through equity warrants utilised for? Another Rs 8 bn has been spent on land acquisitions which led the corporate to report a negative cash flow of Rs 6.3 bn against Rs 17 bn in FY10.
-Even though the markets have debunked the land bank theory the local realtors refuse to see the sharp change in market perceptions.
-This explains why a Rs 35000 stock drops to Rs 29 in a matter of 5 years, and there is more downside.
-EPS will work out to Rs 2.6 in FY12 and Rs 3.2 in FY13, tight conditions may even push the stock to sub Rs 20 levels.
WHAT IS LIC BUYING?
Apart from a few shrewd long term investors, know who else was buying aggressively when the markets took a tumble? Life Insurance Corporation or LIC. Having one of the most enviable portfolios in India, LIC bought stocks worth Rs.1000 crore on 5th and 8th August when the markets slipped badly. Imagine what the fall would have been if LIC had not been buying too?
With stocks at a discount of over 30%, while traders and FIIs were making a hasty retreat, LIC stepped in and bought into blue chip frontliners. And what has it been buying? Mainly FMCG, metals, engineering and taking a contrarian call, buying into IT too. So its shopping list consisted of HUL, ITC, Infosys, TCS, Hindalco, Tata Steel, JSW Steel, Voltas and BHEL. LIC is like any other institutional, buying and selling stocks but during the current downward spiral, remained only a buyer. And LIC which has traditionally been always buying into banking stocks, this time around avoided it completely.
LIC has been buying consistently over the past 15 days and its net buying during this fortnight has been pegged at Rs.1800-2000 crore. The giant behemoth institution has an investment target of Rs.60,000 crore for current fiscal, FY12.
Its not that LIC only buys all the time. LIC recently changed its practice of holding scrips indefinitely and following that, in June 2011, when the markets were relatively better, it got out of some 57 illiquid stocks. Prominent amongst them being Gokaldas Exports, Sundaram Finance, Cinemax India, JMT Auto, Crisil, Godfrey Phillips, FGP, Thana Electric, Simplex Mills, Shalimar Wires, High Energy Batteries and Oriental Hotels.
In FY11, LIC on net basis invested Rs.43,000 crore in the equity markets and booked profit of around Rs.17,000 crore as against Rs.400 crore profit it made in FY10. As on March 31, 2011, on a mark-to-market basis, LIC's equity portfolio grew 70% in FY11.
In July, LIC hiked its stake in Reliance Industries to 7.16%, having bought some 18.6 lakh shares during the Q1, at an average price of Rs.867.10/share.
Interestingly, LIC had earmarked Rs.15,000 crore for buying into the PSU IPOs. But with the Govt now planning to postpone a few issues, LIC plans to divert more money into the secondary markets.
LIC typically prefers bulk deals as incremental purchases lead to a spike in share prices. And that is the reason why it remained the biggest investor or should we the 'saviour' for PSU IPOs/FPOs which otherwise would have sunk. LIC literally bailed out REC, NHAI and NMDC. But LIC views these rescue acts as a great opportunity as in smaller companies, being fenced by the limit of 10% of the company's capital, LIC does not get to hold large chunks, given the amount of money it wields. So in IPO/PSU FPO, LIC gets to invest crores of rupees, with no worry about limits.
And unlike FIIs and mutual funds, LIC is not in the markets for short term gains. It breeds no ambition to be the market mover and shaker. It is in for the long haul and its investments are usually long term.
Take a look at the top 40 stocks in LIC's portfolio which accounts for 82% of its portfolio. And you will understand why LIC is juiciest of all the institutions, hoping that this giant gets listed too!
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Brokers to be Fined for Not Collecting Margin Money
Sebi on Wednesday asked stock exchanges to impose heavy penalty on brokers allowing their clients to trade in derivative market without sufficient margin money and said that fines could be as high as the shortfall of funds. While the minimum penalty is 0.5% of the shortfall of margin money, the penalty could be as high as 100%, the Sebi said in a circular. The stock exchanges will have to impose the penalties from September 1, Sebi said.
